Académique Documents
Professionnel Documents
Culture Documents
DEPARTMENT OF LAW
2010
By
Elaine Skene
Oil and Gas industry operations have continually adapted to the challenges
One of the key drivers of all companies operating within the Oil and Gas
The aim of this paper is to evaluate the extent to which industry standard
contracts are used within the UK oil and Gas industry, whilst comparing the
standard models. With the ultimate aim to answer the question, Oil and Gas
This paper starts by reviewing the basic contracting principles, highlighting the
risks that exist within this process and identifying key contract clauses, with
the main focus on risk mitigation. The study shall then analyse model
contracts used within the UKCS Oil and gas industry with the focus being on
how these are received and implemented by various companies working within
the UK Oil and Gas industry. The paper will also look at companies such as
ConocoPhillips UK Limited who do not use model contract. This research will
solution.
i
Acknowledgements
The author would like to acknowledge and thank a selection of people who
the final year of the LLM course and who also have also given guidance and
The author would also like to thanks all those who participated in the research
questionnaire for their time and information, it really was invaluable for this
study.
Finally, but my no means least the author would like to thank family and
friends, who have always been there and provided support during the past 3
years. This work would never have been completed without their support.
ii
Contents Page
Abstract i
Acknowledgments ii
Contents iii
List of Tables v
List of Figures v
Chapter 1 - Introduction 1
2.1 Introduction 9
2.2 What is a contract 9
2.2.1 Offer and Acceptance 10
2.2.2 Intent to be legally bound 12
2.2.3 Capacity to Contract 13
2.2.4 Consideration 14
2.3 Types of Contracts Used within the
Oil and Gas Industry 16
2.3.1 Joint Operating Agreements 17
2.3.2 Production Sharing Agreements 19
2.3.3 Licensing Agreements 20
2.3.3.1General 20
2.3.3.2 Licensing within the United
Kingdom continental shelf 21
2.4 Key Oil and Gas Contract Clauses 24
2.4.1 Indemnification 25
2.4.2 Consequential Loss 30
2.4.3 Limitation of Liability 31
3.1 Introduction 33
3.2 Introduction to Model Contracts 33
3.3 Advantages and Disadvantages of
using model contracts 35
iii
Chapter 4 – Research Methodology 51
4.1 Introduction 51
4.2 Research Objectives 51
4.3 Primary and Secondary Research 52
4.3.1 Secondary Research 52
4.3.2 Primary Research 53
4.4 Research Sample 57
4.5 Data Analysis 58
4.6 Research Limitations 58
6.1 Introduction 74
6.2 Demographic Results 74
6.3 The use of LOGIC Contracts 77
6.4 Additional Standard Government Models 82
7.1 Introduction 85
7.2 Conclusions 86
7.3 Recommendations 87
APPENDICES
BIBLIOGRAPHY 96
iv
LIST OF TABLES
LIST OF FIGURES
Figure 6.1 Time involved within the UKCS oil and gas industry 75
v
Chapter 1 – Introduction
Oil and gas were the most important natural resources to be discovered in the
The UK oil and gas industry benefits our lives in many ways. Its
industry and heat homes, fuel for transport to carry goods and
people all over the world and the raw materials used to produce
For centuries small quantities of oil have been produced in Britain During the First
World War, when the importation of oil became more difficult, the Government
first began to consider the idea of encouraging companies to drill for oil. The
Petroleum (Production) Act 1918 conferred on the Crown the right to control
exploration and production in the UK and to grant licences for that purpose. The
war ended soon after the Act was passed and, with the resumption of cheap and
readily available imports, it was not until early 1930's that interest in
During that time, a more systematic and concentrated exploration effort was
the Paris Basin, to the Midlands, North of England and Scottish Lowlands. The
Petroleum (Production) Act 1934, which repealed the 1918 Act, reaffirmed the
1
http://www.oilandgasuk.co.uk/knowledge_centre.cfm - last accessed 05/05/2010
1
Crown's ownership and set out the framework to allow production. The first
successes came in 1937 when an onshore gas field was found in Yorkshire, soon
followed by a small oil field near Nottingham. By the 1940's 40,000 tonnes of oil
economy.
and gas related goods and services: The exploration for and
extraction of oil and gas from the UKCS accounted for around
spending.2
There have been many factors since the late 90s which have brought change
within the UK oil and gas industry. One of the most significant changes was
the steady increase on the price of oil. The price of oil and gas has increased
2008. This resulted in increased turnover and made the North Sea oil and gas
operators relatively cash rich. However, during 2009 the oil price has slumped
2
http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm
2
back from $140 per barrel to around the $40. 2010 has seen the price of oil
slowly rise with the average price in April being $85 per barrel. 3
Oil and Gas industry operations have continually adapted to the challenges
perceptions within society. To overcome and manage these changes, oil and
agreements and spreading costs over their many assets, traditionally, this
industry has only been interested in cost saving initiatives during the hard
times4. The industry has now begun to mature with total output in decline. As
a direct result of this there has been a trend whereby the larger oil companies
are selling shares in mature assets to focus on new emerging oil and gas
markets. As a result there has been an influx of new entrant oil and gas
operators within the market. “There is now a broad array of firms that are
One of the key drivers of all companies operating within the Oil and Gas
productivity. However during the period of high oil prices, cost became less
important and the focus of the operators shifted to reaping the rewards
available from producing oil and gas. However, the recent crash in the price
of oil is likely to change the nature of the environment once again and
resurrect the issue of cost reduction and efficiency to be top of the agenda for
UKCS oil and gas operators. One way in which cost reductions and efficiency
3
Figures extracted from http://www.oilnergy.com/1obrent.htm#since88 - last accessed 25/4/2010
4
Cox, A., (2008), Wild-West or Collaborative Innovation?, obtained from article presented by Andrew Cox,
Chairman, Newpoint Consulting and Visiting Professor Universities of Exeter, Nyenrode & San Diego,
presented to oil and gas UK
5
http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm - last accessed 05/05/2010
3
may be achieved is through government initiatives and working with the Oil
The UK Government and UKCS oil and gas operators for many years have
agreed that it was essential that new ways to improve the efficiency of the oil
and gas industry were developed. This resulted in the creation of a number
of initiatives in the 1990’s to find away forward. The main initiatives are
outlined below.
1. In 1992 the Cost Reduction Initiative in the New Era (CRINE) was created.
from all sectors of the UK offshore industry and its main objective was
Continental Shelf (UKCS). In 1996 when it became clear that the whole
ways of reducing costs and working more efficiently, CRINE evolved into
new bodies and initiatives designed to reduce costs and promote the
2. In 1998 the Oil & Gas Industry Task Force (OGITF) was formed in
recognition of the dramatic fall in oil prices, the maturing of the UKCS,
and the urgent need to reduce the cost base of activity in the basin. Its
overall objective was to create a climate for the UKCS to retain its
6
CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE Network, London.
4
position as a pre-eminent active centre of oil & gas exploration,
competitiveness7.
Pilot is a joint programme involving the Government and the UK Oil and
SME’s – aiming to secure the long term future of the industry in the
UK.8
1999 by the Government's Oil and Gas Industry Task Force (OGIFT) to
supply chain9.LOGIC was the vehicle used to educate the Oil and Gas
standard contracts10.
5. Oil & Gas UK (OGUK) is the leading representative body for the UK
offshore oil and gas industry in the United Kingdom by working closely
7
http://www.pilottaskforce.co.uk/data/phistory.cfm - last accessed 09/05/2010
8
http://www.pilottaskforce.co.uk/data/aboutpilot.cfm- last accessed 09/05/2010
9
http://www.logic-oil.com/about.cfm- last accessed 09/05/2010
10
Ibid
5
with companies across the sector, governments and all other
this by -
raising the profile of the UK offshore oil and gas industry, one of the
promoting open dialogue within and across all sectors of the industry
This paper aims to evaluate the extent to which industry standard contracts
are used within the UK oil and Gas industry, whilst comparing the variation of
models.
an evaluation of those companies who choose not to use LOGIC and the
contracts,
In order to meet the above defined aims the following stages will be
necessary:
1. An introduction to Oil and Gas contract law. This will outline the basic
key contract clauses explaining there importance within the Oil and Gas
contracts used within the Oil and Gas industry and how this can vary.
who created the contracts and why. And shall include discussion on
7
use of LOGIC within the Oil and Gas Industry and how this differences
between companies.
This will give a brief overview of who ConocoPhillips are and what they
do. It will examine why ConocoPhillips do not use standard Oil and Gas
the number and types of qualifications that companies use and will be
Now that the background and aims of this study have been outlined, it is
prudent to focus on contracting within the UK. Chapter two shall begin with
used within the UKCS Oil and Gas Industry. Thereafter there will be
discussion on key contractual clauses and there importance within the UKCS
8
Chapter 2 – Oil and Gas Contract Law
2.1 Introduction
contracting, both generally and in relation to the Oil and Gas Industry.
here being on risk management and its importance within the UKCS oil and
contracting with reference to legislation and case law, and an analysis of its
Before looking at specific Oil and Gas related contractual issues, it is prudent
to review the basic principles of what a contract actually is, how it is created
The agreement generates rights and obligations that may be enforced by the
courts. The name given to the document used to record an agreement e.g.
Purchase Order, Agreement, Contract, etc does not affect the nature of the
12
Jenks, E(1917) A digest of English Civil Law, London, Butterworth and Co, Vol 2.1 – taken from Gibb, A
& Gordon (2009) A Law basics – contract, 3rd edition, W Greenp2.
9
There are three basic elements in the formation of a valid contract. First,
parties must have reached agreement (offer and acceptance); secondly, they
must intend to be legally bound; and thirdly, both parties must have provided
valuable consideration.
An offer and an acceptance are necessary in order to ensure that the parties
terms made with the intention that, if accepted it shall become a binding
contract.
offeree to the offeror, to all terms of the offer, made with the intention of
accepting.
in writing.
There are a number of situations where it is obvious that offer and acceptance
10
Furmston13 comments that a court will examine all the circumstances of the
case to see if one party is assumed to have made a firm offer and if the other
party has accepted that offer. However it is not always obvious that offer and
acceptance has been made. Situations where not so obvious include: counter-
situation Lord Denning14 took the view that the circumstances as a whole
all.
Poole15 argues that it has been proven that courts will certainly hold that there
events in terms of offer and acceptance. This was view was reinforced by Lord
Therefore it is clear that the courts when reaching conclusion will consider the
words and actions of the parties during the negotiations. Broadly speaking
there are two stages that are crucial to form a contract – an offer must be
In deciding whether an agreement has been reached by the parties, the courts
tend to take an objective approach. The test is whether or not it would appear
13 th
Furmston, M (2007), fitfoot & furmstons’s law of contract, 14 Edition, Butterworths, Cheshire,p39
14
Butler Machine Tool Co.Ltd v Ex-Cell-O Corporation (England) Ltd (1979) 1 WLR 401
15
Poole, J (2006), Contract Law, 8th Edition, Oxford university press. London, p21.
16
New Zealand Shipping Co Ltd v M. Satterthwaite & Co Ltd, The Eurymendon [1975] AC 154 (PC)
11
to a “reasonable man” that an agreement had indeed been reached. As stated
However, Elliot and Quinn18 state that acceptance may be inferred by the
be an acceptance of the offer if the offeree suggested that there silence would
Now the key issues of offer and acceptance have been considered, the other
Huntley, Blackie and Cathcart21 state that the difficulty lies in establishing
logical and fair rules for differentiating those which do from those which do
not. Some agreements are so serious in their consequences that the law
generally requires that they be in the appropriate form if they are to be legally
17
Muirhead & Turnbull v Dickson (1905) 7 F686
18
Elliot, C & Quinn, F. (2003) Contract Law, 14th edition, Longman Press, p19
19
(1877) 2 App Cas 666
20
(1995) 1 WLR 474
21
Huntley. J, Blackie.J & Cathcart. C (2003) Contract – cases and materials 2nd edition, W green, p14
12
certain types of agreements intend to enter into legally biding relations. The
legally binding. This is backed by Bradgate and Savage22 who state that the
Balfour23.
support this,
In addition, to the intent to be legally bound, the parties must have the legal
capacity to contract. The law requires that persons entering into a contract
drunkenness is valid, unless the person is, at the time of contract, incapable of
understanding the nature of the transaction and the other party is aware of
this. In addition minors, I.e. persons under the age of 18, are subject to
22
Bradgate, R & Savage, N. (1991) Commercial Law p24
23
(1919) 2KB 571 (CA)
24
Elliot, C & Quinn, F. op cit p20
13
Furmston confirms that it is essential that a contracting party is a person
independent person25.
Companies are classified according to the manner in which they are created,
they are either registered, statutory and chartered. The main focus of this
registered under the Companies Act 1985. These companies have capacity to
enter into contracts that are within the limits of the objects clause of the
outside the activities detailed in the memorandum is said to be ultra vires, and
therefore invalid. Elliot and Quinn26 explain that the purpose of this limit in
capacity is to protect the shareholders and creditors against directors who use
2.2.4 Consideration
“promises”. However most contracts within the UK oil and gas industry are
25
Furmston, M op.cit. p564
26
Elliot, C & Quinn, F op.cit. p60
14
Consideration is the requirement of reciprocal obligations on the parties to a
performance of their side of the contract. In other words each party must give
something in return for what it gained from the other. Poole27 argues that this
exchange for the promissors which is bought as defined by Lord Deundin 28.
consideration cannot be in the past, it must be in return for the promise or act
If all of the above requirements are complied with the parties should have a
binding contract. As a general rule all Oil and Gas contracts must meet all the
27
Poole, J (2006) op.cit, p185.
28
Dunlop Pneumatic Tyre Co.Ltd v Selfridge & Co Ltd (1915) AC 847
29
Bradgate, R & Savage, N. (1991) Commercial Law, Butterworths , London p18
30
Lowe, J.S ( 2003) Oil and Gas Law , 4th Edition, Thomson press, p383
15
Although the foregoing discussion concentrates on contract formation at a
general level, the same principle must be applied to contract places within the
UK Oil and Gas industry. This is because the contracts placed within the Oil
and Gas industry will be subject to the same legal proceeding should there we
an issue, for example breach of contract, or a claim against the contract under
Now that the basic principles of contract formation, under English law, have
Oil and Gas companies enter into a variety of different contracts, some of
these agreements are forced upon them by the Law and others are to aid
operations, reduce costs or share risks with other like oil and Gas companies.
Oil and Gas companies commonly enter into agreements with other oil and gas
companies to pull resources via Joint venture agreements or for the provision
of goods and services. They also enter into contracts directly with the
agreements, this is because the government hold the right for exploitation of
16
2.3.1 Joint Operating Agreements
Joint Operating Agreements (JOA’s) are one of the most important and
commonly used types of contract in the oil and gas industry. Originally
developed in the USA, they are today used by oil companies all over the world.
A JOA is entered into to regulate the interests of the parties who come
together in a joint venture. These parties pool their resources for the purpose
associated risks and rewards. Styles31 believes there are several benefits of
In essence the JOA has two principal functions, one is to document the
proportions in which the parties will share the rights and obligations of the
venture. The most common division is in accordance with the interests of the
participants. The other is to specify the way in which the operator will
31
Gordon, G & Paterson, J(2007) Oil and Gas law- Current practices and emerging trends, Dundee
university press, p265
17
manage, subject to the direction of an operating committee, in the event that
Prior to entering into the JOA the parties will have enter into a Joint Bidding
Agreement (JBA) at the stage of making their joint application for licence
also include key points to be incorporated into the JOA if the application is
successful.
The JOA will detail each party's percentage interest, entitlement to benefits
not joint, and will be backed by indemnities. The indemnities will usually
contain the provision whereby the parties agree to indemnify and hold each
other harmless for any claims and liabilities, to the extent of their percentage
interests under the JOA. Indemnities and limitation of liability are discussed in
The parties to the JOA will appoint an Operator to run the joint venture. The
Operator will, in most cases, be a party to the licence and have a substantial
interest in the venture. The Operator's role will include: organising meetings;
acting as agent with third parties on behalf of the venture and the day to day
32
Smith, E. E, et al.(2000) International Petroleum Transactions, 2nd edition, Denver, Colorado: Rocky
Mountain Mineral law Foundation, p164.
18
As discussed at the start of this chapter, Oil and Gas companies often enter
into contract directly with the government for the rights of petroleum
Production sharing Agreements are the main type of contracts used for the
not grant licences over areas to exploit petroleum, as is the case in the UK,
but instead the government, or often the state oil company on behalf of the
contractor develops the reserves and supplies all of the resources required to
do that for a share of the petroleum reserves. The contractor is rewarded with
a share of production.
of the agreement.33
Licensing Agreements are also another example of contracts between Oil and
33
Taverne, Bernard, edited by David, Martin R,(1996) Upstream Oil and Gas Agreements, Sweet &
Maxwell, p44.
19
2.3.3 Licensing Agreements
2.3.3.1General
In the early years each arrangement was negotiated separately with each
or modified.34
The processes by which these changes have occurred vary; in the US the
courts and administrative agencies have played a huge role in changing the
original agreements. Sovereign states have not had the option to turn to the
nationalisation to regain control over natural resources, this was the approach
taken by Mexico. Where as the Middle East nations managed to talk the oil
34
Hamilton, (1973)Concession to Participation: Restructuring the Middle East Oil Industry, 48 N.Y.U.L Rev
744, p 776-77
20
2.3.3.2 Licensing within United Kingdom Continental Shelf
In order to explore for oil and gas it is necessary to have access to lands or
subsea areas which are not usually owned by the companies’ conduction the
exploration. All oil companies must ensure it has all necessary and relevant
permits and authorities to enable it to do so. This will involve the co-operation
sharing agreement.35
The UK's onshore petroleum licensing regime was set up under the impetus of
the fuel demands of the First World War. The Petroleum (Production)
Act36vests all rights to the nation's petroleum resources in the Crown, however
the Secretary of State can grant licences that confer exclusive rights to
As with any licensing system, many of the detailed regulatory provisions are
are observed.
35
Jennings, Anthony,(2001) Oil and Gas Exploration Contracts, Sweet & Maxwell, p1.
36
The Petroleum (Production) Act 1934, This Act has since been consolidated along with other petroleum
related legislation, in the Petroleum Act 1998
21
operations conducted under it. Each Licence actually takes the
There are five different types of licence available under the UK licensing
regime –
3) Promote licences
The main type of offshore Licence is the Seaward Production Licence, which
confers exclusive rights over defined areas. They do not only cover production
- they cover the full life of a field from exploration to decommissioning. For
As there are companies which only carry out exploration activity over wide
areas of the offshore sector and do not require exclusive rights to do this,
petroleum exploration licences are available. This type of licence was made
licences are non-exclusive and will run for three years and permit the holder to
37
https://www.og.berr.gov.uk/upstream/licensing/overview.htm - last accessed 02/05/2010
22
The promote licence is a relatively new licence which has been created by the
objective of catalysing offshore activity in the UK. Under the promote licence
licensees have a legal interest in the commercial value created by their work
but, in order to retain their licences, are obliged to undertake or secure drilling
Within the UK system there are three ways of acquiring licence interests, by
Most petroleum Production licences may only be applied for in licensing rounds
specified blocks. The notice will set out the information required for each
application as well as the criteria upon which applications are assessed. Most
38
Gyaltsen, S and Turton, A,(2003) International Energy Law & Taxation Review , The Master Deed and
changes in the North Sea, p258.
23
Interested parties can also acquire a licence interest by purchasing it from
consent of the Secretary of State and there are statutory regulations set out
factors which should be taken into account. The main concern is whether the
financial capabilities.
Each licence carries an annual charge, called a rental. Rentals fall due each
each square kilometre that the Licence covers at that date. Rentals have two
exploit, so as to free it up for others who do; and they concentrate their minds
These examples show the diversity of contracts that Oil and Gas companies
enter into. The accelerated pace of change in the Oil and Gas industry makes
paper shall review the key contract clauses that should be given careful
consideration.
In all oil and gas contracts there are a number of common issues with regards
to content, regardless of what the contract is for. The main areas in which all
39
Except that for pre-20th Round Seaward Production Licences in their Initial Terms, rentals only fell due in
Year 1.
40
http://www.emagister.co.uk/shared/uploads_courses/files_projects_2/106_oil_dubai_web.PDF - last
accessed 09/05/ 2010.
24
The oil and gas industry is an inherently hazardous one. Exploring for,
whole host of risks: to people, property, the environment, and to the valuable
commodity itself. The oil and gas industry has developed a number of
Generally speaking oil and gas contracts seek to depart quite radically from
clauses; (b) clauses that exclude liability for what are commonly, if
limitation on liability.41
2.4.1 Indemnification
reimburse the other party for certain costs, expenses, outlays or damages. This is
which may arise in delict or tort. However, to ensure that a contact captures in an
indemnity all possible claims, then it is common to see wording that includes
Indemnities have long been used to control risk in contracts, not just those related
to the oil and gas industry, and have been traditionally treated by the law with
indemnity are more limited than those, which would be potentially due under
41
Gordon, G & Paterson, J op.cit, P 335
25
the normal rules of damages arising from breach of contract or from
delictual/tort claims.
party agrees to make payment to the party having the benefit of the
described by Gordon, above. However within oil and gas contracts, it is common
that additional wording is added to simple indemnification clause to state that the
parties will also defend claims taken against the indemnified party.43
Although simple indemnifications are used, the most common type of indemnity
A contractual device where the parties with one hand give and with
In other words mutual indemnities provide that each party shall be responsible
for and shall save, indemnify, defend and hold harmless the other from and
42
Gordon, G & Paterson, J op.cit,, P 336
43
This was discussed by Lord President Rodger in the inner house phase of Caledonia North Sea Limited v
London Bridge Engineering Ltd 2000 SLT 1123 at 1155.
44
Gordon, G & Paterson, J op.cit,, P 337
26
against all claims, losses, damages, costs (including legal costs), expenses and
a) Loss of, damage to or destruction of any property of the other party and
its subcontractors;
Gordon states that the underlying legal principle of the mutual indemnity
regime is that the parties are allocating (more properly, re-allocating) between
themselves the risk of the occurrence of a particular type of loss.46 The idea is
that an indemnity clause places the risk with the party who is best placed to
deal with it, effectively making each party responsible for there own loss.
Prima facia, the mutual indemnity sounds illogical. However there are a
45
Adapted from Logic – Construction contract – accessed at http://www.logic-oil.com/construct2.pdf,
46
Gordon, G & Paterson, J op.cit,, P 341
27
therefore keeps costs down. It also reduces litigation by creating
industry.47
contracting groups to the clause are correct, these are usually referred to as
Company Group and Contractor Group and take into consideration a number
VENTURERS, its and their respective AFFILIATES and its and their
CONTRACTOR GROUP.
agency personnel).49
47
Warne, P , Contract indemnity clauses – keep a watchful eye on the case law, The press & Journal,
Published: 01/02/2010, accessed at
http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI
48
Further discussion of LOGIC standard contracts can be found in chapter 3
49
http://www.logic-oil.com/marine2.pdf - last accessed 05/05/2010.
28
Although these definitions are broad, there may however be many different
gaps to appear within the indemnity chain outlined above. Therefore on July
1, 2002 the Industry Mutual Hold Harmless (IMHH) Scheme went live. The
primary objective of the Scheme was to address the contractual gap, which
Shelf.
Sharp51 comments it is not intended that the IMHH Deed that participants sign
So far the practical application of indemnity clauses has been discussed, the
focus now shall be on the position of such clauses at law. Gordon52 comments
that the UK has no specific statutory controls in place for the use of indemnity
clauses in oil and gas contracts. This can be contrasted with the United
Stated of American oil industry whereby state legislature has passed oilfield
virtue of the Unfair Contract Terms Act 1977 and case law. In Thompson v T
50
http://www.imhh.com/about.cfm - last accessed 01/05/2010
51
Sharp, D, (2007), Standard bulletin : Special edition – offshore, p.6 accessed at http://www.standard-
offshore.com/docs/SB_Oct07_disclaimer.pdf on 01/05/2010.
52
Gordon, G & Paterson, J op.cit, P 352
29
Lohan plant hire53, the courts decided that indemnity clauses are not
limit liabilities.
As the indemnity regime applied within the oil and Gas industry does not
follow the traditional rules of contract law and torte, it is essential that
indemnity clauses are well drafted, that they do not lack clarity in regard to
poorly drafted indemnity clause may be subject to traditional law and not
defined as loss suffered as an indirect result of breach of contract, the test for
Within the Oil and Gas industry parties are keen to exclude this clause as it
place can place excessive losses upon them. Gordon agrees with this concept
but states that it is not always easy to ascertain which limb of the Hedley test
a particular loss will fall into. Therefore as explained during the discussion of
drafted. Gordon56 states that here has been some disagreement on what the
53
1987 2 All ER 631
54
Warne, P , Contract indemnity clauses – keep a watchful eye on the case law, The press & Journal,
Published: 01/02/2010, accessed at
http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI
55
(1854) 9 Ex 341.
56
Gordon, G & Paterson, J op.cit,, P 380
30
statement to say ‘ includes but not limited to’ the potential heads of loss items
listed. Jennings57 favours the former approach on the basis of clarity, but the
latter is the one most commonly used throughout the UK oil and Gas industry
standard documentation.
obligations placed upon them – issues that each party will be liable for.
negotiations of the parties. The chosen figure is either stated as a lump sum
that neither party is unreasonably ‘out of pocket’. These liability caps are very
common within Oil and gas industry contracts, especially where parties are
Logic standard contract have the option to limit the liability to a certain figure,
however specific areas of liability are not covered and should be dealt with in
From the discussions above it is clear that there is a potential for massive
exposure to parties who enter into a contract that does not contain a suitable
57
Jennings, A, (1999) FPSO agreements in David, M, Oil and Gas infrastructure and mid stream agreements
(1999), Sweet & Maxwell at 210.
58
Gordon, G & Paterson, J op.cit, P 381
31
does not limit liability thus leaving one or more parties to the contract
This chapter has covered the concept of contract formation both generally and
in respect of the Oil and Gas industry and concludes that the general
principles must be applied in all Oil and Gas related contracts. It then
discussed key contract clauses concerned with risk mitigation, with the key
focus on indemnities and limitation of liability. There are other key contract
One way in which Oil and Gas companies can ensure that all the key clauses
are covered by the contract is to use a standard form/ model contract such at
operators and contractors within the UKCS oil and Gas industry. The use of
model contract in general and Oil and Gas specific model contracts, such as
32
Chapter 3 – Oil and Gas Model Contracts
3.1 Introduction
essential that the appropriate risk mitigation steps are taken as well as
that these key clauses are included is through the use of model contracts.
contract.
The use of model contracts shall be discussed in general terms before focusing
in the standard forms of contracts that are currently in use within the UKCS Oil
Everyday within the oil and gas industry millions of contractual transactions
are concluded, therefore it is clear that the oil and gas industry stands to
large sums of money, considerable risk, vast liabilities and many difficult
In the past companies would create a set of contracts that represented their
counterparties would result in these contracts being altered to the point where
they were mutually agreeable. This process often took a long time and used a
33
significant amount of resources. It was not unusual that where two companies
prior transaction, the negotiation process would often start over again each
Over the years of contracting using the method outlined above, commercial
and legal personnel in the industry finally started to recognise that there were
Over the last several decades, the industry has taken this
name a few, for the purpose of this study they shall be referred to as
model contracts.
acceptance and usage. Within the oil and gas industry model contracts are
used by numerous parties, the most common type is that between oil
59
Martin, TJ and Park JJ (2010)- Global petroleum industry model contracts revisited: higher, faster,
stronger, Journal of World Energy Law & Business, Vol. 3, No. 1, p 6
34
contracts for production sharing agreements and are used to grant petroleum
to establish what the benefits of such a model, and the benefits to those
One of the main advantages of model contracts it there ability to provide cost
efficiency. There are significant savings of time and costs involved in the use
60
Onorato, W and Park JJ, (2001)World petroleum legislation: Frameworks that foster oil and gas
development, 39(1)
Alta L Rev 95, 70–126.
61
Martin, TJ and Park JJ Op.cit p 8-12
35
of model contracts. Following on from this, another advantage of model
advantage is risk avoidance, often due to the time constraint involved work
commences before the contract has been concluded. Model contracts help to
rate which means companies are exposed to less risk. It is also argued that
most model contracts are generally better drafted than contracts that are
produced by parties who are not using model contracts. Martin 62 then goes on
model contracts that become widely used as the industry standard result in
academic and judicial interpretation of the model contracts being used. All of
this reduces the cost and risk of doing business. By minimising the number of
issues that need to be addressed, model contracts provide to the industry the
abbreviated negotiation sessions that are focused on the key issues at stake.
Many industry associations have built their reputation for usefulness in large
part on the fact that they have brought together the best teams and created
and maintained the best model contracts for the industry. There are also
contract will learn more in such drafting committees than by any other means.
62
Ibid
36
As well as there being a number of advantages to using model contracts,
there are also a number of issues that industry associates should consider
when deciding whether or not create and maintain new model contracts.
The general approach to model contracts is that most associations that create
an industry model seek to create a balanced and fair agreement that takes
However, the real world is often different from this, with one party being
stronger than the other, this leads to the stronger party will propose changes
to the model to benefit itself. Therefore to make the transaction work the
weaker party must accept this. Another disadvantage of the model contracts
is that they are often used by people who are under qualified as there is a
perception within some areas of the industry that little knowledge of contract
relates the foregoing, in basis terms one party will propose a change that is
the provisions of the model. The counterparty will object to the change on the
basis that the model contract is what the industry has agreed and should not
be amended. Often within the oil and gas industry there is a tendency once a
model contract has been agreed that parties try to make this model fit all
every transaction, whether or not the model is actually suited to that type of
transaction. Finally it is fair to say that some models may contain flaws. This
is often because issues where not identified at creation or just simply because
63
Ibid
37
of the nature of the oil and gas industry where everything is continually
developed for different sectors and only reflect that sectors view point.
All the main advantages and disadvantaged have been discussed in turn,
Martin64 believes
role within the UKCS Oil and Gas industry, some of which are discussed below.
The UK gas industry over the last few decade has developed a number of model
contracts to assist companies working within the industry. Perhaps the most
widely used and well known are the CRINE contracts, recently superseded by
LOGIC contracts.
The North Sea has traditionally been an expensive place to explore for and
produce oil. This was because the province was born out of high oil prices from
64
Martin, TJ and Park JJ op.cit p12
38
the Middle East wars; cost was not a priority issue and the UK's main objective in
the early days of the North Sea was self-sufficiency in oil. The bottom line was
result of these inefficiencies, and the cratering of the oil price during the 1990's, a
new initiative was born in 1992 - the Cost Reduction Initiative in the New Era
(CRINE) 65.
The initiative was steered by a committee comprised of senior executives from all
sectors of the UK offshore industry and its main objective was simply to find ways
of reducing capital and operational costs on the UKCS. The CRINE report,
published in late 1993, made several findings. One of the most fundamental of
In 1996 when it became clear that the whole industry supply chain must be
engaged in finding new and innovative ways of reducing costs and working
formulation of a series of new bodies and initiatives designed to reduce costs and
promote the efficiency of the North Sea as an environment for doing business.
There are currently over thirty initiatives that focus on areas key to the
One of the major ways in which the CRINE initiative sought to reduce costs was
contractors with the use of standard contracts. These were drafted by participants
65
CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE Network, London.
39
from all sides of industry and are used on a regular basis in the North Sea oil
that most operators and contractors have developed their own standard
'deviations' from the standard CRINE documents, and hence it is still necessary
The lack of standardisation prevailing prior to CRINE meant that the contract
amount of time as people from both sides were required to check and re-check all
ensure that they were not being left open to unexpected or unacceptable
liabilities. It has been stated that the development of CRINE contracts was
difficult and the attempt was almost abandoned due to a lack of agreement.
The Standard Contracts Committee which drafted the original model contracts
and which was a part of CRINE and later CRINE Network is now a part of LOGIC
('Leading Oil and Gas Industry Competitiveness') -an industry funded body, lead
by representatives from the Department of Trade and Industry (DTI) and trade
Contractors (IADC), the Energy Industries Council (EIC) and the Well Services
66
Which has now been superseded by Oil and Gas UK (OGUK)
40
Contractors Association (WSCA)) which works with companies throughout the oil
LOGIC was created in 1999 by the government's Oil & Gas Industry Task Force
competitiveness of the UK Continental Shelf. With initial funding from the DTI
and the industry, LOGIC was the vehicle used for delivering workshops and
projects such as Vantage POB, the Master Deed, Industry Mutual Hold
The model contracts only comprise those general terms and conditions where
one could reasonably expect that different contracts between different parties
skeleton boilerplate framework, which parties can amend as appropriate and upon
which they can include their special conditions to suit their particular needs.
significant gains in efficiency and reduction in costs - both financially and in terms
contract negotiations.
67
ibid
68
http://www.logic-oil.com/about.cfm - standard contracts, last accessed 2nd May 2010.
69
http://www.logic-oil.com/contracts.cfm - standard contracts, last accessed 2nd May 2010.
41
In the 2001 UKOOA survey of usage, over 95% of senior oil
Standard Contracts.70
commonly known and understood foundation around which the Company and
This eliminates much of the effort historically spent reviewing, qualifying and
However the contracts so not meet all the requirements of all companies and
therefore time will often still be spent reviewing and qualifying the contracts,
Services, Purchase Order Terms and Conditions, Supply of Major Items of Plant
and Equipment, Well Services and Contracts and Sub-Contracts for Small /
These contracts have provided the Oil and Gas industry a basis on which to
contract. However there are still certain areas within these model contracts
that need further attention such as the risk mitigation clauses. As discussed in
70
ibid
71
http://www.logic-oil.com/contracts2.cfm - guidance notes , last accessed 26th April 2010.
42
parties covered by the contract, there may however be many different
gaps to appear within the indemnity chain outlined above. Therefore on July
1, 2002 the Industry Mutual Hold Harmless (IMHH) Scheme went live. The
primary objective of the Scheme was to address the contractual gap, which
Shelf.
The IMHH Scheme has evolved from popular demand in the industry for clarity
identical risks.72
A committee was established under the auspices of LOGIC to review the issue
and propose a solution. The produced an industry mutual hold harmless deed
(the “IMHH Deed”), allowing all offshore oil and gas industry contractors to
sign up to a mutual hold harmless scheme (the “IMHH Scheme”). The IMHH
Deed adopts mechanisms commonly used in the offshore oil and gas industry
discussed above.
facility at any one time. Unless the Operator specifically provides to the
case by case basis, such contractors will be third parties to each other as there
72
http://www.imhh.com/about.cfm - last accessed 03/05/2010
43
These third party contractors will be liable to each other for any injury and loss
they cause through their negligence. With the high frequency of incidents and
the drive to take action through the courts the cost to the industry of resolving
The primary objective of the IMHH Scheme is to address the contractual gap
which traditionally exists between contractors working on the UKCS. For some
part of their normal contracting process, but these are tied to specific
contracts for specific facilities. While this deals with a part of the problem it
only accounts for a small proportion of the industry activity with many gaps
campaign.
Scheme as core contractors to the Deed. However there are some Operators
who have signed up to IMHH, this is evident form the questionnaire results in
chapter 5.
but the IMHH Scheme will be a success if it obtains support from the majority
of contractors regularly providing services to the offshore oil and gas industry.
73
ibid
44
The principal liabilities addressed within the IMHH Deed are as follows 74:
out of (i) the carriage of goods by sea; (ii) the provision of Emergency
Response and Rescue Vessel(s) or services associated with them; and (iii)
3. The IMHH Deed will not take precedence over existing contractual
needs.
74
http://www.imhh.com/about.cfm - last accessed 03/05/2010
75
http://www.imhh.com/benefits.cfm - last accessed 03/05/2010
45
Cost effective and efficient means of improved risk management for
It is believed that the industry as whole will make a significant financial saving
benefit in reduced insurance premiums. The legal burden incurred by the oil
and gas industry is also, to some extent, reflected in the insurance industry.
Reduced claims and counter claims may lead to a reduced level of legal fees
premiums. However, risks in the industry will not change: the IMHH Scheme is
simply a method of allocating liability. The IMHH Scheme should reduce the
need for “double insurance” but does not remove the need for insurance
altogether76. From this discussion it is clear that the IMHH plays a crucial role
in mitigating risk within the Oil and Gas industry, where there are no formal
contracts in place.
There are also a number of other model contracts within the UKCS oil and Gas
agreements have been developed under the auspices of the Oil and Gas UK with
commercial procedures.
Included within this is the use of First Point Assessment Limited (FPAL). FPAL was
set up in 1996 to provide a one stop website where customers could review the
76
http://www.imhh.com/about.cfm - last accessed 03/05/2010
46
skills available in the market for any particular piece of work they required77. As
well as being a supply chain database, FPAL is a key tool used by oil and gas
purchasers to identify and select current and potential suppliers when awarding
contracts. One of the most recent tools available from FPAL are model ITT
templates. These templates are available to download for free for the purpose of
simplifying the contracting process and providing an easier and faster way to
produce, issue and respond to ITT/bid packages, there are templates for – drilling
has not been well received with many companies not being aware of there
existence, let a lone the benefits they could bring. There have however been
other agreements which have been adopted into everyday practice much more
Like all other aspects of the oil and gas industry it was recognised that there
Operating Agreement Form 610. This model has since been revised but
remains similar to the 1956 original. Styles79 states AAPL Form 610 was an
influential model on the early UKCS JOAs which were introduced in the wake of
the first licensing round in 1964. This was evident in the fifth licensing round
where all JOA has to include the then State-owned British National Oil
BNOC took a model form JOA drafted by UKOOA a year earlier, adapted it to
77
http://www.fpal.com – last accessed 9th may 2010.
78
Adapted from - http://www.fpal.com – last accessed 9th may 2010.
79
Gordon, G & Paterson, J op.cit p265
47
its needs and produced the “BNOC Proforma Joint Operating Agreement for
working under the support of UKOOA, produced the 20th round Draft JOA. this
had proven to be an influential model, with the latest revision taking place in
2009.
liabilities. The 2009 update took place to ensure the JOA reflects current UKCS
80
Gordon, G & Paterson, J op.cit p265
48
quickly establish the arrangements needed to underpin successful
The "Master Deed" was developed by Oil & Gas UK Progressing Partnership
The offshore oil industry has given the Master Deed broad
In the past deals were often significantly delayed by the need to get a range of
signatures applied to many documents, even when all parties are content with
it. The Master Deed creates a mechanism which simplifies the complex and
purchase of offshore licence interests in the UKCS. Under the Master Deed,
faster and less complex. The main benefit of the master deed is that it
81
Dymond, P, Oil & Gas UK presents suite of model agreements to improve industry efficiency, 16/02/2009,
accessed at http://www.oilandgasuk.co.uk/news/news.cfm/newsid/379 on 1/5/2010
82
http://www.masterdeed.com/about.cfm - last accessed 03/05/2010
49
which in turn speeds up the transfer process significantly. This creates a more
North Sea assets. Complex commercial and legal structures are no longer a
There are also a number of other standard forms available within the UKCS oil
and Gas industry but these have not been considered for the purposes of this
paper.
From the foregoing discussion it is clear that there are many advantages as
within the UKCS oil and Gas industry has brought with it a number of
efficiencies in the way that contracts are drafted and negotiated. These
saving with the aim to save time and money as they eliminate the need for
the model contract it balanced the individual clauses are not. This is
because on the trade off that went on in the drafting the suppliers
won some arguments about the wording in some clauses and buyers
reasonable and tempered overall but in the detail there are many
comprises and benefits to one party over the other. This is why
83
Senior Supply chain professional involved in drafting of Logic – information provided in response to
questionnaire/ interview process
50
Chapter 4 –Research Methodology
4.1 Introduction
action plan setting out the different stages and timescales of a study, are all
with the research. Methodology is important because, “the methods you use
will significantly affect the answers you get”85. Based upon the research aim
presented along with discussion on how this framework was constructed from
This study aims to evaluate the extent to which oil and gas companies use oil
and gas industry standard contracts, whilst comparing the quantity and types
84
Marchington, M., and Wilkinson, A., (2003). People Management and Development. 2d Edition. London:
CIPD
85
BLAXTER, L., HUGHES, C. and TIGHT, M., (2006). How to research. First ed. Berkshire: Open
University Press.
51
information regarding general best practice for contract formation and the
general use on oil and gas standard contracts. However there has a minimal
to the UKCS oil and gas industry standard contracts. Therefore, in order to
an evaluation of those companies who choose not to use LOGIC and the
contracts,
Secondary research involves processing data that has already been collected
findings such as reports, press articles and previous market research projects
86
http://www.businessteacher.org.uk/markets/primary-secondary-market-research/ last accessed 2/05/2010
52
The literature reviewed has been utilised to define the concept, display
elements and to demonstrate the importance of contracts within the UKCS oil
and gas industry. Additional literature has been used to identify and provide
details of current trends with regards to the use of model contract within the
UKCS oil and gas industry. The sources used to achieve this include text
The literature review has allowed the author to formulate theoretical best
research element of this study. It is felt that this offers the study valuable
data with specific examples of how industry standard contracts are used and
why. The best practices are compared with the primary research analysis in
chapter 6.
Primary data is collected for a particular purpose and is new information. This
research.
87
Preece, R., 1994. Starting research. 1st Edition. London: Pinter Publishers, p. 80
53
Primary research data can be separated into two main categories: quantitative
Quantitative Qualitative
Principle orientation to Inductive;
the role of theory in Deductive; testing of generation of
relation to research theory theory
experiences which are important, fewer people take part in the research, but
the contact with these people tends to last a lot longer. Under the umbrella of
interviews. If a market researcher has stopped you on the streets, or you have
filled in a questionnaire which has arrived through the post, this falls under the
people, but the contact with those people is much quicker than it is in
qualitative research.
Both types of research were exercised for this study. Firstly quantitative
88
Bryman,A, (2004) Social Research Methods, 2nd Edition, Oxford University Press, P20
54
out. There are a number of advantages and disadvantages89 associated with
Advantages:
generalised results.
• Surveys can be relatively easy to administer, and need not require any
fieldwork.
Comparisons to be made.
• With a good response rate, surveys can provide a lot of data relatively
quickly.
Disadvantages:
• The data, in the form of tables, pie charts and statistics, become the main
focus of the research report, with a loss of linkage to wider theories and
issues.
• The data provide snapshots of points in time rather than a focus on the
• The survey relies on breadth rather than depth for its validity. This is a
89
Blaxter L, Hughes c and Tight, M,(2006) How to research, 3rd edition, open university press, p79
90
Questionnaire attached in Appendix B
55
assess the reliability and validity of this technique. Bell and Opie91 define
structured governs both the research findings which can, and cannot, be
combination of open and closed questions were asked. Open questions give
in a way that suits there interpretation93. Closed questions limit the number of
possible answers to be given.94The main reason for combining the two types of
questions was that open questions are a useful follow up to closed questions
as they often give the rational behind the closed question. Once the
questionnaire had been compiled, it was critical to the study that the correct
interviews took the form of informal semi structured face to face interviews
with the Procurement Manager UK and the North Sea Contracting Supervisor
91
BELL, J. and OPIE, C., (2002). Learning from research. 1st Edition, Buckingham: Open University Press.
P245
92
BELL, J. and OPIE, C.op.cit P249
93
May, T (2001) Social Research, issues methods and processes, 3rd Edition, Oxford university press page
102
94
Ibid
56
Interviewer generally starts with some defined questioning plan,
conversation.95
This approach was used as author already new the interviewees and therefore
felt this was the most suitable approach. The questionnaire discussed above
was used as the basis of the interview. The purpose of the interview was to
get more detailed answers for some of the open questions as well as any
There are numerous Oil and Gas operators, contractors and service companies
within the local area. The timescale imposed meant that it was not possible to
Limited (FPAL) was used. FPAL was set up in 1996 to provide a one stop website
where customers could review the skills available in the market for any
particular piece of work they required96. Almost every contractor in the UK North
which codes it will register under. The codes are fairly detailed. Once the
companies had been selected connection was made via email, the contact details
were received. This rational was also applied when selecting the appropriate
In order for analysis the gathered data must be organised into a manageable
format. This was completed manually by separating the data into sets. The
The information that emerged from each question was then collated into a
spreadsheet for all the closed questions in order to allow the fragments of data
to be brought together into categories with shared properties. For the Open
questions key points of each question were transcribed onto a word document
There are a number of possible research limitations to this study which are
discussed as follows:
The main constraint on this study was time, which limited the period
58
Follow up interviews could not be conducted on the questionnaire
Oil and Gas UK ran a one day workshop, called Model contractual
Supply Chain Solutions on the 28th April 2010, but due to the cost of the
obtained.
59
Chapter 5 – Case Study: Contracting Philosophy at ConocoPhillips UK
Limited
Oil and Gas companies. The main advantages of these model contracts is that
it saves time and money, as there is less time spent negotiating contact,
which in turn saves money. However not all companies within the UKCS use
model contract such as LOGIC. One of the findings from the questionnaire
was that 3 of the respondent companies said they did not use industry
and the activities in which they are involved. Thereafter this chapter reviews
the contracting structures used at ConocoPhillips and the reasons for such a
structure. It will also review why ConocoPhillips choose not to use Standard
60
Headquartered in Houston, Texas, ConocoPhillips operates in more than 30
and production and refining and marketing strategies and business objectives;
September 1964 when acreage was awarded to the company in the first U.K.
licensing round. In 1968, the Viking gas field was discovered and first gas was
produced in 1972. Since then, the U.K. portfolio has grown to include
In the central North Sea, the company is operator of, or has an interest in a
97
ConocoPhillips fact sheet – January 2010
98
Adapted from - http://www.conocophillips.com/EN/about/who_we_are/our_business/Pages/index.aspx -
last accessed 10 April 2010.
99
ConocoPhillips fact sheet – January 2010
61
In the southern North Sea, ConocoPhillips operates the Lincolnshire Offshore
Gas Gathering System, the Viking transportation system, the Caister Murdoch
also has non-operated interests in the southern North Sea and holds interests
Theddlethorpe gas terminal and the Teesside Oil terminal. It also holds a non-
include the Humber Refinery and the Immingham Combined Heat and Power
Plant and its marketing activities in the UK consist of JET branded retail sites,
advised of the main reasons that ConocoPhillips do not currently use any
only use its own Company standard terms and conditions, this was the case
even before Conoco and Phillips merged in August 2002. On several different
it has always been decided that the LOGIC standard terms would need to be
heavily qualified to cover the specific needs of the company, therefore it would
not be in the Companies best interest, as this would lead to longer and more
costly negotiations.
62
One of the main areas in which ConocoPhillips UK Limited would qualify LOGIC
if they were to use it in its current form would be risk allocation, the
who are involved in the project for which the goods/services are
indemnity regime.100
regime.
because the company is controlled centrally out of Huston. This has a major
100
Adapted form ConocoPhillips internal training documentation.
63
As LOGIC is only a UK wide initiative the US management do not recognise the
significance of the standard contracts. The contract templates that are used by
consistency across the entire company and not just on a country by country
basis.
A third factor is that the current contract templates that are used at
they have the right volume of contract and that the meet the requirements of
the company. Each of the ConocoPhillips contract documents are based on the
US and all contracts must contain these clauses and the prescribed provisions
within them.
64
The fifteen corporate clauses are as follows;
2. Confidentiality
3. Patent infringement
5. Applicable Law
8. Audit
9. Force Majeure
11. Insurance
12. Taxes
13. Assignments
Although the fifteen corporate clauses are placed upon all regions and there
subsequent business units by Head of office in USA, these clauses are region
specific and are maintained locally to ensure they are always up to date with
65
5.3 Standard Contracts at ConocoPhillips UK Limited
contracts provided by LOGIC, instead they have a suite of contracts that they
TEMPLATE REFERENCE
contracts that they use. The contract template used for each agreement is
66
The MSA (Major) is one of the most commonly used contracts at
ConocoPhillips UK Limited. The MSA (Major) is used when the intent its to
establish general terms and conditions for the future procurement of medium
rental of goods, which do not fall within the guidelines applicable to a Master
Purchase Orders are included. The Purchase Order should only need to include
details of the schedule for performance of the work, the location for
performance/delivery of the Work, any additional rates and prices and any
Although the MSA (Major) details the conditions and a detailed description of
commitment granted.
The Master Services Agreement (Minor) is used to establish general terms and
conditions for the future procurement of ad-hoc or recurring low risk services
and/or the purchase or rental of goods, which do not fall within the guidelines
used for offshore well operations or marine related work, regardless of value
67
or duration. This is because this template does not contain the appropriate
The MSA (Minor) must include a detailed description of the goods and services
should only need to include details of the schedule for performance of the
work, the location for performance/delivery of the Work, any additional rates
The MSA (Minor) should not be placed for a period in excess of 5 years
The Aviation Service Agreement is only used for the procurement of helicopter
should not be placed for a period in excess of 10 years, including all option
periods.
A time charter party agreement will be used to establish general terms and
conditions with a vessel owner for the hire of marine vessels (e.g. platform
supply vessels, multi role vessels and emergency response and recovery
Agreement. The Charter Agreement will contain details relating to the specific
vessel hire, start date, end date, day rate, etc. As future requirements arise,
68
There are industry standard contracts for Time charter parties, however as
and instead have there own version, albeit that ConocoPhillips UK Limited TCP
for the procurement of R&D services from a single Contractor and a multi
party agreement which is used for procurement of joint R&D projects between
A REA should not be placed for a period in excess of 5 years, including all
option periods.
are they have a number of Contactor personnel that work for them. A
very different form a contract of employment that would be issued to all staff
personnel.
A PSA should not be placed for a period in excess of 10 years, including all
option periods.
69
A Drill Rig agreement is used for hire of drilling rigs and associated services. A
DRA should not be placed for a period in excess of 10 years, including all
option periods.
and subcontractors must be clearly identified and form part of the contract.
Each EPCIC contract will be for a specific project and therefore the duration of
The TIA must contain a detailed scope of work, schedules for performance of
the work and compensation provisions, together with the execution plan and
interface responsibilities.
A TIA should not be placed for a period in excess of 5 years, including all
option periods.
70
Materials Frame Agreements are used for repetitive procurement of low risk,
etc. and may also include services, where the service element is related to the
supply of the materials and is a minor part of the overall contract value.
However this type of contract cannot be used for offshore well operations
THE MFA must contain a detailed description of the goods and services to be
supplied, with call-offs through Purchase Orders. The Purchase Order should
only need to include details of the schedule for performance of the work, the
delivery/performance location, any additional rates and prices and any specific
deliverables expected.
A MFA should not be placed for a period in excess of 10 years, including all
option periods.
of low risk, low value services and materials that is not covered by an existing
MFA or MSA. Purchase order Terms and Conditions may be used for minor
offshore services (e.g. repair of snooker table, coffee machine or other like ad-
hoc services), which are demonstrably low risk, as well as low risk onshore
services. This type of agreement cannot be used for offshore well operations
work and compensation provisions, which clearly specifies the nature and price
this type of contract due to the nature of the goods and service being provided
under them.
71
A Confidentiality agreement is used whenever ConocoPhillips UK Limited will
From the findings of this study it is clear that ConocoPhillips UK Limited are
currently part of a minority that do not use LOGIC standard contracts. This is
evident from the questionnaire results in chapter 6. The results show that
from the companies that responded to the questionnaire that only 9% if do not
use LOGIC standard contracts. The reasons given by these other companies
are very similar to those discussed above, namely that corporate templates
Due to the nature of the UK Oil and Gas industry operations have continually
would require permission from their Head Office in USA. This is not likely to
different contract than the rest of the ConocoPhillips Group. In addition there
all personnel working with the contracts would need to be trained in the use of
72
ConocoPhillips UK Limited may look again at LOGIC as a method of
would adopt LOGIC in its current form, but they may consider it if LOGIC was
updated.
73
Chapter 6 – Questionnaire results
6.1 Introduction
This chapter presents the findings of the primary research that were carried
out for this study. This chapter is split into 3 main section to reflect the
2. Analysis of the use of LOGIC standard contracts within UKCS oil and Gas
industry;
The presentation of the findings will ultimately assist in the achievement of the
an evaluation of those companies who choose not to use LOGIC and the
contracts,
A selection of UKCS oil and gas companies were targeted as part of this
research dissertation. They were sampled from a listings found within FPAL as
74
completion of the questionnaire because it was felt they would hold the most
reasonably good with a 55% response rate. Babbie101 believes that a response
Question 1
The length of time the operator had been involved in the UKCS Oil and Gas
Figure 6.1: Time involved within the UKCS oil and gas industry
25
20
15
No. of
Companies
10
0
0-6 years 7-12 years 13-18 years 19 years +
Duration in years
Figure 6.1 identifies that the respondents to the questionnaire ranged from
being relatively new to the industry through to being long term established
101
Babbie, E,(2001) The practice of Social Research, 9th Edition, Wadsworth p 256
75
strategies and methodologies used by a variety of companies at varying
degrees of maturity and experience with the UK Oil and Gas industry.
Question 2
value of the organisation’s annual turnover. The aim of this was to attempt to
draw out any connecting between the rate of annul turnover and if this
influenced the contracting strategy used. The purpose was to see if there was
any connection between, new companies which currently have a relatively low
turnover and if they used standard contracts as a method to save money. The
30
25
20
No. of
15
Companies
10
0
£0-3M £4-10M £11-25m over £26m
Annual Turnover
The analysis showed that for the majority of respondents there annual
turnover was at the higher end of the scale. Although it is felt that there is a
placed upon them. However, the time limitations placed upon this study did
The next section of the questionnaire was designed to analyse the use of
LOGIC standard contracts. 91% of the respondents answered yes they do use
LOGIC at least one of the standard contracts; the majority of the 91% use
more than one of the standard contracts. This is positive insofar that a large
number of companies use LOGIC; however it was stated by LOGIC102 that over
95% of senior oil company managers said they supported the principles of
Standard Contracts. The findings in this study do not support this, although
For the purposes of the questionnaire analyses the respondents were grouped
Subsea Companies, Oil and Gas Operators, Drilling companies and Service
companies.
Question 3
The aim of this question was to analysis if there was a trend between the
types of companies and the use of LOGIC contracts. The results of which are
102
http://www.logic-oil.com/contracts.cfm - last accessed 7th May 2010
77
Table 6.1 Use of Logic across industry Sectors.
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies that use
LOGIC 5 6 10 3 6 30
Companies that do
not use LOGIC 0 1 2 0 0 3
From table 6.1 shows the use of LOGIC contracts across the different industry
sectors. Of the companies that do not use LOGIC, 67% of these are
operators. The remaining 33% are subsea companies. When asked why the
alternative contracting structure they do use, Question 11, the responses were
very similar. The responses were as follows; all the companies’ operators and
subsea companies alike had suites of terms and conditions that they use
instead. One operator stated that their terms and conditions were very similar
to LOGIC with some extra provisions added. The Subsea company stated that
there was a reluctance within there company to use LOGIC as there was not a
uniformed use of them within the industry and until this changed they would
continue to use there own suite of contract. One of the operators identified in
this question was ConocoPhillips UK limited, who’s reasons for not using
Those companies that responded saying they do utilise the LOGIC contracts
were asked a series of questions to get a more in-depth analyses for the
78
Question 4
sectors and the types of contracts they use. It was also to establish the
frequency at which each contract was used. The result of this are shown in
table 6.2.
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company
Construction Edition 2 1 1 3 0 1
Design Edition 2 0 0 4 0 1
Marine Construction
Edition 2 1 5 10 1 2
Mobile Drilling Rigs
Edition 1 0 0 9 2 0
Purchase Order Terms &
Conditions (Short Form)
Edition 2 3 1 7 1 4
Services (On- and Off-
shore) Edition 2 5 4 9 0 5
Supply of Major Items of
Plant and Equipment
Edition 2 4 1 9 1 3
Well Services Edition 2 2 1 7 1 2
SME Services Edition 1 2 1 3 0 0
Subcontract for SME
Services Edition 1 1 0 2 0 0
From table 6.2 it is clear that every LOGIC contract is used by at least on
sector. With 40% of the LOGIC contracts are used across all sectors. This
Question 5
The aim in this question was to establish what the companies that use LOGIC
79
question, a number of different answers were received and overall
These generalisations include that the use of LOGIC contracts saves time as it
both parties to the contract are generally familiar with the content and format
of the contract, this in turn save the companies money. These findings
correspond with the aims of LOGIC which are ‘to simplify the industry’s
procedures and to save costs104’. They also concur with the findings of
Martin105, who states cost savings as one of the main benefits of model
contracts. In addition one new entrant operator stated that the use of
standard contracts saves them from having to develop their own contracts –
Questions 6, 7 and 8.
Due to the close connection of these questions, they shall be dealt with
majority are in favour of the LOGIC contracts, however when asked if they
qualify the LOGIC contracts, all respondents said that they did. The degree to
which people added additional clauses or amended the standard clauses varied
103
O’Leary, Z, (2004), The Essential Guide to doing research, Sage Publications, p159
104
http://www.logic-oil.co,/contracts.cfm - last accessed 8th May 2010
105
Martin, TJ and Park JJ op.cit.p8-12
80
dependant on the type of company and the type of goods/service being
undertaken. When asked the rational behind these qualifications, there were a
the comment that the Standard contracts are generic and do not cover all
Many of the respondents commented that the reason they qualify the standard
company, who stated that they qualify the Mobile drill rig contract because it
is not in line with current legislation, this is because it has not been updated
since 1997. When asked if there were going to be any updates to any of the
update the suite of contracts”106 this means that companies will continue to
qualify contracts to bridge the gaps in the legislation and risk mitigation
clauses.
Question 9
None of the respondents who use LOGIC contract use the standard templates
of standardisation has not been fully achieved. This said the use of the
processes, however the fact that each company using the templates adds a
number of qualifications, highlight the fact that a standard contract will never
106
Email correspondence with Ross McKenzie, Solicitor & Business Advisor LOGIC/Oil & Gas UK - dated
25th February 2010.
81
6.4 Additional Standard Governmental Models
The final section of the questionnaire was designed to analyse the use of
additional government initiatives. This section looks at the use of FPAL model
This section looks at how many respondents use the model ITT and the
reasons for using them and the reasons why they are not used.
All of the companies that do not use LOGIC also stated that they do not use
FPAL standard ITTS. From the remaining respondents only 37% of them said
that they used the FPAL model ITT’s. The reasons given for there use is similar
to that for the use of standard contract. The use of the model ITT’s saves
companies time and money, as they do not need to draft the documents, the
companies receiving these documents are familiar with the format and
content, allowing a quicker turn around of tenders and tender evaluation. The
saves them time, as they are not required to create there own documents.
Provide and easier and faster way to produce, issue and respond to
ITT/bid packages.
However the majority of respondents, 63%, do not use the FPAL ITT’s. There
a number of different reasons for this, 5 respondents stated that they do not
107
http://www.achilles.com/en/PFAL/ITT-Templates - last accessed 8th May 2010
82
tender and therefore do not need to use the industry standard ITT documents.
There were 2 respondents that said they were not familiar with the Model
ITT’s. The most common response was that the companies already had there
stated they must utilise. This said there were 2 respondents that said, despite
having internal company ITT’s they were currently reviewing the standard
Question 15
This question looks at the number of respondents that are currently signed up
to the Industry Mutual Hold Harmless scheme. The results show that 63% of
the respondents have signed up to IMHH. For those companies that are not
signatories to IMMH, 73% of these are Operators with the remaining 27%
being, the IMHH Deed is designed for, and signed by, the
situations and given that the operator sits at the top of the
108
Gordon, G & Paterson, J op.cit.P 375
83
It is clear form the results of the questionnaire that model contracts are
widely used within the UK Oil and Gas Industry. The results from the study
have identified areas within the LOGIC standard contracts where there are
failings or gaps within the standard models. This is evident by the fact that
100% of the companies who were identified as using LOGIC, said that they
The findings also show that other governmental models, such as the model
ITT’s are not so widely used, this is partially because of lack of knowledge of
84
Chapter 7 – Conclusion and Recommendations
7.1 Introduction
The aim of this paper was to evaluate the extent to which industry standard
contracts are used within the UK oil and Gas industry, whilst comparing the
standard models. With the ultimate aim to answer the question, Oil and Gas
the risks that exist within this process and identifying key contract clauses,
with the main focus on risk mitigation both in general terms and in relation to
In order to examine and critically assess the UK oil and Gas industry standard
by examining the main advantages and disadvantages of doing so. It was also
initiatives that exist with the UKCS oil and gas industry and how these are
issues raised by the analysis of the contract processes and use of model
contracts but also address the issues raised by the results if the questionnaire.
85
7.2 Conclusions
1. Analysis of case law and legislation clearly show that the law provides
protection to the contracting parties, but may also penalise a party due
that parties should ensure to take full advantage of the protection they
are given. This involves the parties to the contract being aware of how
indemnities, this study has established that the law allows such clauses
very clear that such clauses should be drafted clearly, otherwise the
basic law principle of the party who breaches is liable will apply. With in
Oil and Gas contact the indemnity clauses are usually mutual indemnity
clauses, which places the risk with the party who is best placed to deal
with it, effectively making each party responsible for there own loss.
The key point is that regardless of the type of indemnity clause used, as
that the use of LOGIC contracts saves time as it limited the negotiations
contract are generally familiar with the content and format of the
contract, this in turn save the companies money. This may explain why
86
91% of the respondents utilise the LOGIC contracts. However the
need improvement, certain key aspects are missing from the contracts
and some of the legislation contained within the contracts is out of date
which leads all of the respondents adding in qualification. The key point
here is that although the LOGIC contracts are a good basis for building
a contract, no respondents use the contracts ‘off the shelf’, they all add
7.3 Recommendations
In order to address the issue of out of date legislation within some of the
these in the revised editions. This would result in less time being spent
contracts may also encourage some companies who do not currently use
2. Education process.
not aware of the FPAL model ITT’s. It would therefore be advisable for a
87
examples of how the documents should be completed and reviewed. There
should also be follow-up session if and when any changes are made to the
model ITTs.
conduct is work and for the reasons discussed previously does not use
current contracts and bring them more in line with LOGIC. By doing this
quicker and easier as parties with whom they are contracting, may be more
familiar with the content of there contracts, if they are similar to LOGIC. It
of FPAL model ITT’s for their tendering needs, this too could save time and
parties may be familiar with the ITT documents and therefore may be in a
There are other recommendations that can be made, however if the above
improving the efficiency of model contracts within the UK Oil and Gas
the UK Oil and Gas industry that these models are performing well, but
88
Appendix A
Purchase Order Terms This contains the Purchase Order Procurement transactions
& Conditions (Short Terms & Conditions (Short Form) involving high volume, low
Form) Edition 2 and Guidance Notes. value, or low technical risk.
Services (On- and Off- This contains the General Conditions A wide range of offshore and
shore) Edition 2 of Contract for On- and Off-shore onshore services.
Services Edition 2, Guidance Notes
and a Sample Form of Agreement.
This replaces separate onshore
and offshore contracts.
SME Services Edition 1 This contains the General Conditions A wide range of services
of Contract for SME Services, provided by SMEs.
Guidance Notes and a Sample Form
of Agreement and is largely based on
On- and Off-shore Services
Subcontract for SME This contains the General Conditions A wide range of services
Services Edition 1 of Sub-Contract for SME Services, provided by SMEs when acting
Guidance Notes and a Sample Form as sub-contractors.
of Agreement and is largely based on
On- and Off-shore Services
Supply of Major Items This contains the General Conditions The purchase of complex
of Plant and of Contract for Supply of Major Items capital plant and equipment
Equipment Edition 2 of Plant Equipment, Guidance Notes such as gas turbines,
and a Sample Form of Agreement. compressors and pumps.
Well Services Edition 2 This contains the General Conditions Service contracts associated
of Contract for Well Services, with well engineering work.
Guidance Notes and a Sample Form
of Agreement.
89
Appendix B
Questionnaire
Responses from this questionnaire will be kept strictly confidential, neither the
names of interviewees nor their respective organisations will be identified in
the dissertation report.
1. What length of time has your company been involved within the UKCS
Oil and Gas industry?
90
4. Which of the following contracts does your company use?
Construction Edition 2
Design Edition 2
Marine Construction Edition 2
Mobile Drilling Rigs Edition 1
Purchase Order Terms & Conditions (Short Form) Edition 2
Services (On- and Off-shore) Edition 2
Supply of Major Items of Plant and Equipment Edition 2
Well Services Edition 2
SME Services Edition 1
Subcontract for SME Services Edition 1
91
10. Why does your company not use LOGIC Standard contracts?
11. What contracting structure do you use instead? What are the
advantages of this structure?
13. Why does your company use the model ITT’s? What are the advantages
to your company?
14. Why does your company not use the model ITT’s?
Yes No
92
Yes No
If you have any additional comments you wish to make on the above topics
please make them below.
93
Appendix C
Questionnaire Results
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that use
LOGIC 5 6 10 3 6 30
Companies
that do not
use LOGIC 0 1 2 0 0 3
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company
Construction Edition 2 1 1 3 0 1
Design Edition 2 0 0 4 0 1
Marine Construction
Edition 2 1 5 10 1 2
Mobile Drilling Rigs
Edition 1 0 0 9 2 0
Purchase Order Terms &
Conditions (Short Form)
Edition 2 3 1 7 1 4
Services (On- and Off-
shore) Edition 2 5 4 9 0 5
Supply of Major Items of
Plant and Equipment
Edition 2 4 1 9 1 3
Well Services Edition 2 2 1 7 1 2
SME Services Edition 1 2 1 3 0 0
Subcontract for SME
Services Edition 1 1 0 2 0 0
94
Question 6 – Does your company qualify/amend LOGIC Contracts?
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that qualify
LOGIC 5 6 10 3 6 30
Companies
that do not
qualify
LOGIC 0 0 0 0 0 0
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that use
FPAL Model
ITT's 0 1 7 0 3 11
Companies
that do not
FPAL Model
ITT's 5 6 5 3 3 22
Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that are
Signatories
to IMHH 5 7 4 0 6 22
Companies
that not
Signatories
to IMHH 0 0 8 3 0 11
95
Bibliography
Books
BELL, J. and OPIE, C., (2002). Learning from research. 1st Edition,
Press,
CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE
Network, London.
ELLIOT, C & QUINN, F. (2003) Contract Law, 14th edition, Longman Press.
Butterworths, Cheshire,
GORDON, G & PATERSON, J(2007) Oil and Gas law- Current practices and
96
HUNTLEY. J, BLACKIE.J & CATHCART. C (2003) Contract – cases and materials
JENKS, E(1917) A digest of English Civil Law, London, Butterworth and Co, Vol
2.1 – taken from Gibb, A & Gordon (2009) A Law basics – contract, 3rd edition,
W Greenp2.
LOWE, J.S ( 2003) Oil and Gas Law , 4th Edition, Thomson press, p383
MAY, T (2001) Social Research, issues methods and processes, 3rd Edition,
POOLE, J (2006), Contract Law, 8th Edition, Oxford university press. London.
PREECE, R., 1994. Starting research. 1st Edition. London: Pinter Publishers.
97
Articles
Professor Universities of Exeter, Nyenrode & San Diego, presented to oil and
gas UK
revisited: higher, faster, stronger, Journal of World Energy Law & Business,
Vol. 3, No. 1.
that foster oil and gas development, 39(1) Alta L Rev 95.
Cases
WLR 401
98
Caledonia North Sea Limited v London Bridge Engineering Ltd 2000 SLT 1123
Statutes
Electronic Sources
Electronic Articles
http://www.oilandgasuk.co.uk/news/news.cfm/newsid/379
99
Sharp, D, (2007), Standard bulletin : Special edition – offshore, p.6 accessed
at http://www.standardoffshore.com/docs/SB_Oct07_disclaimer.pdf
Warne, P , Contract indemnity clauses – keep a watchful eye on the case law,
http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI
Websites
http://www.achilles.com/en/PFAL/ITT-Template
http://www.businessteacher.org.uk/markets/primary-secondary-market-
research/
http://www.conocophillips.com/EN/about/who_we_are/our_business/Pages/in
dex.aspx
http://www.emagister.co.uk/shared/uploads_courses/files_projects_2/106_oil
_dubai_web.PDF
http://www.fpal.com
http://www.imhh.com/about.cfm
http://www.imhh.com/benefits.cfm
http://www.logic-oil.com/about.cfm
http://www.logic-oil.com/construct2.pdf
http://www.logic-oil.com/marine2.pdf
http://www.masterdeed.com/about.cfm
http://www.oilandgasuk.co.uk/knowledge_centre.cfm
http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm
http://www.oilnergy.com/1obrent.htm#since88
http://www.pilottaskforce.co.uk/data/aboutpilot.cfm
http://www.pilottaskforce.co.uk/data/phistory.cfm
100